In what now seem the simpler days of December, when there was only a pandemic to worry about, Federal Reserve officials rallied around the view they could tame inflation with modest interest rate hikes while the economy and labor market thrived. READ:
A war in Europe has now been layered on top of the health crisis, and when US central bank policymakers meet this week they will have to decide just how much damage has been done to that rosy outlook, and whether their hopes for an economic “soft landing” have been diminished or dashed altogether.
“There is no doubt that the FOMC will start raising rates … What everyone wants to know is what the Fed will do next?” Roberto Perli and other analysts at Piper Sandler wrote. If new projections show the target federal funds rate exceeding 2.50% in coming years, it would “signal that the majority of the FOMC is so worried about inflation that it doesn’t care risking a recession in order to bring it down quickly. Needless to say, that would be a very hawkish development.
Unemployment has now plummeted to 3.8%, low by historic standards, and households are flush with cash from pandemic-related government aid programs. Fed rate-hike cycles often come with their own particular guidance, with words like “measured” or “gradual” sprinkled into policy statements to convey the intended pace of rate increases. Mr. Powell recently has been using less-concrete terms like “nimble” for a policy expected to include steady rate increases this year, but which may have to either be sped up or slowed in response to fast-changing events and conditions.
The war in Ukraine has no clear resolution and could stoke even more inflation through increased energy costs, further disruption to supply chains, or even a reordering of global trade and governance that could mean persistently higher prices.